Outsourcing and the rebirth of Ireland plc

An economic crisis compounded by a banking meltdown which sees ordinary savers punished while big bankers get off scot-free? That may sound like the scenario playing out in Cyprus this week, but if you take a flight a couple of hours west, you’ll hear the same sentiment echoed across Ireland. Once described as the Celtic Tiger, the economy was brought to its knees by a combination of declining productivity and reckless lending. While the legacy of mortgage debt means ongoing depressed domestic demand, the country is exporting more than ever, with companies finding outsourcing an effective form of improving their cost base, and, in some cases, becoming outsourcers themselves.

An economic crisis compounded by a banking meltdown which sees ordinary savers punished while big bankers get off scot-free? That may sound like the scenario playing out in Cyprus this week, but if you take a flight a couple of hours west, you’ll hear the same sentiment echoed across Ireland. Once described as the Celtic Tiger, the economy was brought to its knees by a combination of declining productivity and reckless lending. While the legacy of mortgage debt means ongoing depressed domestic demand, the country is exporting more than ever, with companies finding outsourcing an effective form of improving their cost base, and, in some cases, becoming outsourcers themselves.

The collapse in the economy took hold in late 2007 and the figures are startling. Nominal GDP for 2012 stood at €158.9bn, a drop from €187.7bn in 2007. Unemployment during the same period increased from 4.2 per cent to 14.6 per cent. The Irish Stock Exchange recorded a high of 9,981 in February 2007 and within two years dropped to its lowest point in 14 years (1,977 points) in February 2009. Today an incredible 11.9 per cent of mortgages are in arrears of 90 days or over.

While the domestic economy continues to tack an exit from the doldrums, the export economy is seeing hitherto unprecedented levels of growth. Total exports in 2012 were at their highest level ever, at €182.182bn with service industries accounting for €87.257bn of this. The IT industry accounts for some 40 per cent of that figure.

Falling off a cliff: from Celtic Tiger to bust

How did things go so badly wrong? In the 1980s Ireland was one of the poorest countries in Europe and the realisation emerged that a dramatic policy intervention was required. A well-educated English-speaking workforce, relatively low salaries and business costs, along with low corporate tax and large grants saw a proliferation of large IT companies locating in Ireland. Along with this, a number of EU aid programmes helped to build the infrastructure required to attract high-tech organisations.

At the same time IT companies in India were building negative publicity with regards to their capability to deliver quality IT products. Ireland was well positioned to take advantage of the market, grabbed the opportunity and attracted investments from companies such as Intel, Dell, HP and Microsoft. By 1994, UK analyst Kevin Gardiner coined the term 'Celtic Tiger' in a report for Morgan Stanley. The phrase resonated internationally and became the moniker for an economy which saw high levels of growth for over a decade.

A perfect storm of the dotcom bubble, the rise of the value of the euro, low interest rates, and a rise in salaries and other infrastructure costs forced a sharp slowdown of the Irish economy in 2001. By 2003 the second phase of growth began. This time it came from the construction industry which was fuelled with cheap money. By 2007 Ireland had become one of the most expensive countries in which to live and do business, and the 1990s competitive advantage was lost to Asia and Eastern Europe. Combine that with what could emerge as the largest banking bailout in history and by late 2007 the economic climate had changed irrevocably. According to one CEO I spoke to recently, "in mid-2008 everything stopped. It wasn’t even a bumpy landing; it was like falling off the cliff.”

Export excellence and domestic doldrums

Today domestic stagnation continues, so many firms in the real economy have switched their focus to building their export market. Their peformance is compelling and have resulted in Ireland’s largest-ever trade surplus, which stands at €43bn for 2012. What is behind this success?

The country has managed to attract major international technology companies such as Google, Yahoo, eBay, LinkedIn and DropBox to set their EMEA HQs in Dublin. In many cases, this represents the first time these companies have located facilities anywhere outside the US.

Indigenous organisations that are not confined to the Irish market have been growing through innovative products and services for the export market. The legacy of the downturn, which saw swollen payrolls and staff numbers, means that many of Ireland’s indigenous firms are increasingly turning to outsourcing to improve efficiencies.

Furthermore, the outsourcing industry is on a growth path with global revenues projected to rise from $370 billion to $479.3 billion by 2016. Many Irish firms are themselves providing services in this area.

So, US firms are basing their expanded European operations in Ireland, Irish companies are increasingly using outsourcers to improve efficiencies and an increasing number of Ireland’s technology firms are themselves providing outsourcing technology services. Can this drive a recovery?

Outsourcing and the recovery

The situation and the market are complex. A business colleague of mine is currently in the market for an app developer to take forward an idea. An Indian company gave a quote for €400 as opposed to the €3,000 quote by a local provider. Without a doubt there are risks with offshore outsourcing, and there are hidden costs, but not enough to justify the extra cost here.

For many of Ireland’s companies who face huge legacy costs and significant overhang in terms of debt from the downturn, we’re seeing an increasing use of offshore suppliers for their IT development - or firm plans to do so. These include banks, large corporates and even small-to-medium-sized firms. To reduce cost these businesses have been outsourcing their call centre activities and certain elements of their finance and accounting processes. Many organisations believe that they can get a quality service for much lower cost by outsourcing administrative type activities to offshore organisations.

In contrast, there are high-tech indigenous organisations that have grown their business over the past five years by providing white-label products and services to blue-chip clients in Europe. Firms like Realex, who provide payment processing services, now provide these services in the UK and across Europe. Companies like this rely on innovative technology and becoming the ‘go-to’ firm for their speciality. Others, like Sonru.com, have developed technology solutions to age-old problems (in this case how to reduce the cost of initial personnel interviews) which are used by firms, universities and any recruiting organisation across the globe.

The final tranche are the large technology firms who are once again locating on the island of Ireland. As well as becoming European headquarters for some firms, others focus on providing centralised services, a type of ‘internal outsourcing’ to other major technology firms. Only last week Yahoo announced an extra 200 jobs in its Dublin operations centre, to be recruited over the next twelve months.

Ireland cannot compete in the IT outsourcing and BPO market. In fact, for Irish businesses to compete internationally many more will be forced to outsource what are now considered as commodity activities. Ireland has built an economy based on providing high-calibre experts with customer service culture and of course low corporate tax to large internationals. These will continue see the economy through the storm but to build a sustainable economy the Irish people and organisations need to believe in Ireland and invest into the country. We need more entrepreneurial organisations such as Realex and VoiceSage, who become international beacons providing first-class technology and white-label service solutions as far up the value chain as possible.

It is hard to overestimate the cathartic impact the current recession had on Ireland’s private sector. While the early confidence of the late 1990s may have returned, the legacy of the boom years still impedes much of industry and the domestic economy. The very phrase ‘Celtic Tiger’ haunts the Irish economy like a sneering ghost, but that cannot be allowed to hold back future business growth. Strong fundamentals are in place, but a bright future will see more outsourcing by Ireland’s firms and more of Ireland’s enterprises providing services to clients across the globe.